Vera Bradley designs, makes, and sells women's accessories, including handbags and travel items. The company recently announced 21% revenue growth for Q4 2013, and strong margins that surpassed analysts' estimates. Still, shares fell 8.2% after the company issued a weak outlook for the coming fiscal year.

Vera's Q4 2013 revenues grew 21% year over year to $162.7 million, beating analysts' expectations of $153.18 million thanks to strong growth across its segments. Its direct segment (64% of FY12 revenues) increased 27% amid growth across all of the company's channels, while e-commerce revenues grew 23% on continued growth in website traffic. The indirect segment was up 11% due to a strong sell-in of the winter collection and the addition of Dillard's locations. However, its same-store sales, or comps, decreased 0.4%, mainly because of reduced traffic.

Gross margin for Q413 increased 150 basis points to 57.9%, helped by operational efficiencies, lower freight costs, and favorable channel mix driven by growth in full-price stores. Total selling, general, & administrative expenses increased 25% to $55.8 million, because of employee-related expenses and costs to support the launch of Vera Bradley Baby. As a result, its SG&A margin shrank by 90 basis points.

Overall, operating income increased 22%. The direct segment's operating income rose by the same percentage, but its margin shrank by 140 basis points. In the indirect segment, that margin grew almost 300 basis points to 41.6%, and operating income there increased by 20%.

Vera Bradley seems to face a problem with its inventory levels.
During the last earnings call, the Company had mentioned that it had erroneously ordered $15 million worth of inventory that it could have ordered in H1 14. As a result, it mentioned that its inventory growth will continue to outpace revenue in a range of 10% to 20%, primarily in Q4 2013 and Q1 2014.

Management reassured investors that the items purchased were "top-selling" and expected no problem moving the inventory over the next two quarters. However, the company's declining revenue estimates each quarter (as seen in the adjacent chart), does not giving a promising picture. For Q4 2013, inventory increased 23% to $131.6 million, compared to net revenue growth of 21%..

Cash flows were mainly used for debt repayment of $10.1 million. Furthermore, the company also completed its $22 million distribution center expansion, doubling its capacity to 400,000 square feet.

Key balance sheet highlights include a cash balance of $9.6 million, lower accounts receivable of $34.8 million, and days sales outstanding improving to 48 days, compared to 57 days in the prior year.

Weak FY14 outlook

For Q1 2014, the company expects to be impacted by a weak consumer environment and elevated price competition, resulting in weak comps and sales of $120 million to $122 million.

Gross margin for the first quarter is expected to fall roughly 30 basis points, primarily because of the reduction in revenue, as well as outlet store promotions. SG&A margin is expected to land between 43.5%-46.5%, primarily related to annualizing FY 2013 investments and opening six new stores in the first quarter.

For FY 2014, it expects revenues to be in the range of $585 million to $590 million, and EPS of $1.83 to $1.88, with low- to mid-single-digit comps growth. Analysts were predicting $1.87 and $602 million, respectively. Gross margins are expected to improve 50 basis points thanks to efficiencies, channel mix and lower costs. SG&A is expected to be flat.

The company’s capital expenditures of $20 million will be focused on the build-out of new stores (Vera Bradley expects to open 23 full-price and outlet stores) as well as continued investment in its e-commerce platform. It also continues to build upon its market entry efforts in Japan through new shop-in-shops and department store distribution throughout Tokyo.

Throughout the year, it continued to make key strategic investments to support its current and future growth. This included the opening of 20 new stores and the completion of its distribution center expansion, doubling its capacity and improved operating efficiencies. These efforts are expected to supported FY13 net revenue growth of 17% and net income growth of 19%.

But while Vera Bradley may trade more cheaply than Coach or Kors, its management issues and recent inventory error raise concerns. I would still recommend waiting on the sidelines till the company can prove itself, and invest instead in its more solidly growing rivals.